Should I Include a Non-Compete in My Employment Agreements?
A non-compete agreement, or covenant not to compete, is a common provision in an employment agreement that prohibits an employee from leaving your company and going to work for a competitor for a certain period of time. Depending on your specific circumstances, this document can either save or cause your business a lot of hassle.
Quick Pros and Cons of a Non-compete Agreement
- Protects your trade secrets, customers, and current employees
- Discourages turnover
- Difficult to enforce
- Hinders worker bargaining power and disfavored by public policy
- May prevent you from hiring the best talent
Why Use a Non-Compete Agreement?
A Non-Compete Agreement can prevent former employees or contractors from competing in your industry (subject to reasonable time and place restrictions), soliciting your current customers, poaching your employees, or starting their own competing businesses.
Are Non-Competes Enforceable?
Although often used for both employees and contractors, non-compete agreements are not always enforceable. The enforceability of non-competes is usually decided at the state level, so the rules vary slightly in each state. Some states have outrighted declared all such agreements unenforceable. This is typically a policy decision by a legislature, not the courts.
To learn if your state forbids such agreements, you can plug your inquiry into a search engine. If the issue remains unclear, you might want to discuss enforceability with a lawyer in your jurisdiction.
Courts generally don't want to suppress an individual's right to make a living if it's not truly a threat to your business, so they'll look at whether a covenant not to compete is really needed in your situation.
If the employee has access to your trade secrets, customers, marketing strategy, product strategy, or sensitive pricing information, courts are more likely to enforce the non-competition provision. If the employee is the chief bottle washer, a court won't likely keep the employee from washing bottles for another company. You don't need that protection.
Covenants not to compete also need to have reasonable time and place restrictions. You can't keep your former employee from competing with you forever. Many courts will look at what you need to protect and decide how long the restriction needs to be to keep it protected. For example, things change so quickly in the tech industry that a court may be willing to only enforce a restriction for six months to a year.
Courts also will place a reasonable geographical restriction. If you provided a salesperson with a bunch of leads in your home city, you don't need to prevent her from making sales calls for a competitor in a state thousands of miles away. With the internet breaking down geographic boundaries for business, this factor is becoming less relevant, but a court will still examine how broadly you need your restriction enforced.
Courts will also want to limit the scope of your non-compete. The more limited your non-competition provision is, the more likely a court will enforce it. A prohibition against competing directly with your current customers you gave to the salesperson is much more palatable than preventing someone from working in an industry entirely.
How to Draft an Effective Non-Compete
Keep the provisions narrow and focused
You don't want to draft a non-compete agreement asking for the moon and then negotiate from there. Most states allow courts to selectively narrow overly broad non-compete provisions to make them reasonable. However, other states will invalidate the whole thing if the company starts from an unreasonable position.
Consider what you need to protect
Craft your provision with an eye toward what you really need to protect. Remember, this isn't about punishing a departing employee; it's about protecting your assets.
For many companies, the main concern is the customer list and data. Courts are much more likely to enforce what is sometimes referred to as a covenant not to solicit or a non-solicitation provision. This agreement allows the employee to still make a living in their chosen field, but they won't be allowed to take your customers with them.
If your concern is a tight labor market with a limited pool of candidates who can do the work, you might only need a covenant not to solicit your current employees. This keeps your former employee from poaching the talent you helped develop.
If the employee was high enough in your organization and the competition is so fierce that their departure to a competing company could cripple your business, then a provision preventing competition in the industry may be appropriate.
Be reasonable in time
While there is no hard and fast rule, courts don't like non-competes that are more than two to three years. Ask yourself, if the former employee is sidelined for two years, how much damage can they really do to you?
Be reasonable in geography
Don't prevent a person from finding gainful employment in another location if their work can't hurt you there. If a stylist or dentist moves to the other side of town an hour away, can they actually hurt your business? If you are only selling in one state, you don't need to prevent the employee from working for a competitor in another. Again, there is no hard and fast rule, but when drafting the agreement, determine the specific geographic area you need to protect.
Consider a confidentiality agreement instead
Many companies have moved away from the covenant not to compete and instead have all employees sign a confidentiality agreement. This does not preclude the employee from using their talents and experience with another company, but it does contractually bind them to not use your trade secret and confidential information against you.
Courts are more eager to enforce a confidentiality agreement, but it is harder to prove an employee used a trade secret than proving they went to work for a competitor.
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